A more efficient way to apply for managed funds via ASX

This article appeared in the February 2014 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

Learn more about the mFund Settlement Service.

Photo of Ian Irvine From ASX (Ian Irvine pictured)

As well as investments in shares and possibly property, many Investor Update readers will have investments in unlisted managed funds. These funds have been popular for many years; however the application and redemption process has always been slower and more cumbersome than buying securities on-market.

A new service being introduced by ASX may be of interest to existing holders of unlisted managed funds and to those investors contemplating investing in them.

The mFund Settlement Service (mFund), expected to launch in the first half of 2014, will make it quicker, easier and more efficient for investors to apply for, or redeem, units electronically in unlisted managed funds, using ASX market infrastructure.

(Editor's note:  Access the ASX media release on the mFund Settlement Service. Also check out the new mFunds website).

Under the current system, investors typically receive a hard-copy of the Product Disclosure Statement (PDS) for a managed fund or download a soft copy, complete the application form, provide sufficient identification, attach a cheque or use BPay, and mail the documents to their adviser or fund.

The PDS includes information about the investment's key features, benefits, risks, fees and complaint-handling procedure - it is a vital piece of information to read before making an investment decision. But the paper-based application process in a PDS can be cumbersome and time-consuming.

Under the mFund Settlement Service, the requirement to complete an application form in the PDS for the managed fund will be replaced with an electronic application. A message via a participating ASX broker to the managed fund provider confirms that the investor has been given a PDS, which in turn allows the provider to issue units to the investor, or for them to be redeemed.

For example, an investor wishing to buy units in an unlisted managed fund that invests in Australian shares will instruct their broker or financial adviser that they wish to make the purchase, either through the broker's automated online client order system or via telephone, fax or email - and indicate in writing or electronically that they have been given the accompanying PDS.

The adviser then sends an electronic message to the fund provider that indicates the investor had been given the PDS, and then units in the funds are issued based on the next pricing date.

Key benefits

The mFund Settlement Service process, which has regulatory approval from the Australian Securities and Investments Commission, has three key benefits for investors.

First, managed fund units applied for or redeemed via the mFund Settlement Service are consolidated through a single CHESS holding. CHESS stands for Clearing House Electronic Sub-register System and is the world-class computer system that ASX uses to record the settlement of ASX-listed shares.

Simply put, the mFund Settlement Service will allow investors to consolidate their holdings in managed funds and shares through one statement, via CHESS, rather than potentially having multiple information sources if managed funds are bought through other means.

The second benefit is greater transparency and certainty on the status of applications to apply for or redeem units in managed funds. By time-stamping the receipt of the electronic application via the mFund Settlement Service, investors will have their application processed more efficiently, compared to sending it via mail. This should lead to greater certainty around the price and the timing that units in the funds are issued or redeemed.

The third benefit is the provision of timelier information on the progress of applications. The electronic processing and the associated electronic communications between broker, ASX and the fund will allow greater certainty around things such as, when will my unit price be set and when will my units be shown on my HIN?

It is important to note that units in funds offered through the mFund Settlement Service are not bought or sold on ASX, or priced on the exchange. The daily prices used for accepted application and redemptions are determined based on the fund's net asset value at the end of the day, or in the case of some funds, when they are priced on a weekly, monthly or 90-day basis. The mFund Settlement Service simply replaces the paper-based application system in funds with an electronic straight-through process. It only applies to funds that choose to use the service.

ASX Investor Update asked Ian Irvine, Head of Customer and Business Development, ASX, about the rationale for the mFund Settlement Service and the benefits for investors.

ASX Investor Update: Ian, will the mFund Settlement Service change the way investors invest in unlisted managed funds?

Ian Irvine: No. It follows the same process that unlisted managed funds use today, but makes settlement more efficient by using ASX technology and the CHESS settlement system. An investor in a fund will still have to be given the PDS and make an informed decision whether to invest, and the fund provider will still have to process those applications and issue or redeem funds.

The big difference with the mFund Settlement Service is the ability to tell your broker you want to buy or sell units in the fund using the service, removing the need to fill in an application form and waiting potentially days for it to be processed. Also, investors will not have to provide identification with their fund application, because they have already been identified to their broker. AUSTRAC has made an exemption which removes the need for a customer to also be identified by the fund provider in these circumstances.

ASX Investor Update: What do you see as the main benefits of the mFund Settlement Service?

Ian Irvine: It will make it faster and streamline the process to apply for, or redeem, units in funds. Using technology, an investor will have greater control, compared to those who send paper-based applications via mail.

For example, assume an investor needs to sell his or her managed funds quickly to pay for the deposit on a house. Instead of making a paper-based application and potentially waiting days for it to be processed by the fund provider, the investor instructs their broker to sell the fund. Because the process is much faster, the monies are received sooner in the client's account. And the investor has more certainty around the price at which they sell their units in the fund, because there is less time between sending the application and having it processed.

However, it should be noted that a fund provider may have certain provisions where they may suspend redemptions in the fund - such as the end of the financial year, when they are preparing year-end accounts and need to value the fund for taxation purposes. These circumstances will be outlined in the fund's disclosure document and in such an event; the investors will receive a message outlining the circumstances.

The other key benefit is administrative simplicity. If you buy ASX-listed shares through a broker, and unlisted managed funds via alternative investment options, you will have two accounts to administer. If you use the broker that manages your ASX holdings of shares, LICs, ETFs etc, under your unique Holding Identification Number (HIN), to apply for mFunds, your investment holdings are recorded in the one spot via CHESS.

ASX Investor Update: Will investors be able access information about these funds via the web?

Ian Irvine: We will have dedicated information available on the web which will include the PDS of all participating funds, and become an information and education hub about investing in these products. We believe managed funds play an important role in helping investors achieve the right asset allocation for their portfolios - and see the mFund Settlement Service as an important initiative for long-term investors and those saving for retirement.

ASX Investor Update: How many funds do you expect to use the mFund Settlement Service?

Ian Irvine: Like most innovations, it will start small in its first year and grow from there. There is potential for 40 or so fund managers to initially use the service, resulting in perhaps 80 to 100 managed funds available through the service within the first year or so.

ASX Investor Update: When will it launch?

Ian Irvine: ASX hopes to launch mFund Settlement Service in the first half of 2014.

ASX Investor Update: What can readers expect in the lead-up to the launch?

Ian Irvine: We intend to provide more educational material on the importance of considered asset allocation in portfolios and the role managed funds play in this process, in coming issues of ASX Investor Update. ASX is also developing other education material to help investors understand the features, benefits and risks of the mFund Settlement Service.

From ASX

ASX holds face-to-face seminars and courses around Australia covering the mFund Settlement Service and a range of other products and investment themes. If you would like us to keep you posted about upcoming events register to be included on future communications.

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